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Interface, Inc. (TILE) Should Be Swept Under The Carpet for Now on Valuation Grounds

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Interface, Inc. (NASDAQ:TILE) is a global leader in design, production and sales of modular carpet, and a manufacturer, marketer and servicer of select other floor covering products for the commercial, institutional and residential markets. Interface markets modular carpet in over 110 countries under established brand names such as InterfaceFLOR, Heuga, Bentley Prince Street and FLOR. In broadloom carpet, its Bentley Prince Streetbrand is also a leader in the high-end, designer-oriented sector of the market. The company has a presence on four continents, with over 50% of the business coming from outside the U.S.

Interface, Inc. (NASDAQ:TILE)Business Quality

TILE is the largest global manufacturer of modular carpet, riding on the secular trend of modular carpet moving from a niche to a category. In recent years, modular carpet sales growth in the floor covering industry has significantly outpaced the growth of the industry as a whole, as designers and end users became more familiar with the unique attributes of modular carpet, including its dynamic design capabilities, cost advantages as a result of reduced waste in both installation and replacement, and the ease and speed of installation. Carpet tile was ranked as the number one “hot product” for the tenth consecutive year, according to the 2011 Floor Focus interiors industry survey of the top 250 designers in the United States. Also, carpet tile accounted for less than 50% of the commercial carpet markets in United States, Europe, Asia ex-Japan and Australia, where Interface is among the top two players in each regional market.

Interface has successfully diversified its end use markets in non-corporate office market segments, such as government, education, healthcare, hospitality and retail space, and reduced its dependence on the mature office market. This is evident in its mix of corporate office versus non-corporate office modular carpet sales, where non-corporate office modular carpet sales represented 53% and 40% of its 2011 America and company-wide sales respectively. This opens up new growth opportunities for the company, as non-corporate office market segments as a whole are almost twice the size of the $1 billion U.S. corporate office segment; and Interface is also targeting the $11 billion U.S. residential market segment for carpet as part of its diversification efforts.

TILE’s made-to-order and global manufacturing capabilities allow it to provide custom samples quickly to potential customers and on-time delivery of customized final products. The company has approximately 75% to 80% of its modular carpet products in the United States and Asia-Pacific  markets made-to-order, with the United States, Europe and Asia Pacific accounting for 52%, 30% and 18% of its production, respectively. Its made-to-order capabilities increase speed to market, support a constant flow of new products and decrease lead time to customers; while its global manufacturing capabilities in modular carpet production give it an edge in serving the needs of multinational corporate customers that require products and services at various locations globally.

Valuation and Financial Analysis

Interface currently trades at a trailing twelve months EV/EBITDA of 14.8 and trailing twelve months EV/EBIT of 17.5. In terms of asset based valuations, its current 5.2x P/NTA and 3.8x P/B represent premiums of 18% and 35% over its respective historical five year averages. The company achieved a trailing twelve months ROE of 7.0% and a five year average ROE of 6.5%.

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